nep-mic New Economics Papers
on Microeconomics
Issue of 2010‒04‒17
eighteen papers chosen by
Vaishnavi Srivathsan
Indian Institute of Technology

  1. Leadership Cycles By Piercarlo Zanchettin; Vincenzo Denicolò
  2. Harmful competition in the insurance markets By Giuseppe De Feo; Jean Hindriks
  3. The regulation of a large sports league By Paul Madden
  4. Taxation and Predatory Prices in a Spatial Model By Stefano Colombo
  5. An Elasticity Measure of Welfare Loss in Symmetric Oligopoly By Tim James; Jolian McHardy
  6. Competition in the Korean Internet Portal Market: Network Effects, Profit, and Market Efficiency By Junseok Hwang; Dongook Choi; Jongeun Oh; Yeonbae Kim
  7. Pioneer burnout: Radical product innovation and firm capabilities By Christina Guenther
  8. Partial Multidimensional Inequality Orderings By Jean-Yves Duclos; David E. Sahn; Stephen D. Younger
  9. Asymmetric Information and Bank Runs By Chao Gu
  10. Ambiguous Act Equilibria By Sophie Bade
  11. Tax Responses in Platform Industries By Hans Jarle Kind; Marko Koethenbuerger; Guttorm Schjelderup
  12. Do Social Networks Prevent Bank Runs? By Garcia-Rosa, Alfonso; Kiss, Hubert Janos; Rodriguez-Lara, Ismael
  13. "Minimax Estimation of Linear Combinations of Restricted Location Parameters" By Tatsuya Kubokawa
  14. How do market structures affect decisions on vertical integration/separation? By Noriaki Matsushima; Tomomichi Mizuno
  15. Mining Ideas from Textual Information By D. THORLEUCHTER; D. VAN DEN POEL; A. PRINZIE;
  16. Innovation input and innovation output: differences among sectors By Lesley Potters
  17. Are there social returns to both firm-level and regional human capital? – Evidence from German social security data By Nils Braakmann
  18. Investigating the Effect of Exchange Rate Changes on the People's Republic of China's Processed Exports By Thorbecke, Willem

  1. By: Piercarlo Zanchettin; Vincenzo Denicolò
    Abstract: We study a quality-ladder model of endogenous growth that produces stochastic leadership cycles. Over a cycle, industry leaders can innovate several successive times in the same industry, gradually increasing the magnitude of their technological lead before being replaced by a new en-trant. Initially, new leaders are eager to enlarge their lead and do much of the research, but if they innovate repeatedly, their propensity to invest in R&D decreases. Eventually they stop doing research ltogether, and as they are overtaken a new cycle starts. The model generates a skewed firm size distribution and a deviation from Gibrat's law that accord with the empirical evidence. We also consider various policy measures, showing that in some cases policy should favour R&D by incumbents, not outsiders, and that stronger patent protection may reduce innovation and growth.
    Date: 2009–11
  2. By: Giuseppe De Feo (Department of Economics, University of Strathclyde); Jean Hindriks (Department of Economics and CORE, Universite catholique de Louvain, Belgium)
    Abstract: There is a general presumption that competition is a good thing. In this paper we show that competition in the insurance markets can be bad and that adverse selection is in general worse under competition than under monopoly. The reason is that monopoly can exploit its market power to relax incentive constraints by cross-subsidization between different risk types. Cream-skimming behavior, on the contrary, prevents competitive firms from using implicit transfers. In effect monopoly is shown to provide better coverage to those buying insurance but at the cost of limiting participation to insurance. Performing simulation for different distributions of risk, we find that monopoly in general performs (much) better than competition in terms of the realization of the gains from trade across all traders in equilibrium. However, most of the surplus is retained by the firm and, as a result, most individuals prefer competitive markets notwithstanding their performance is generally poorer than monopoly.
    Keywords: monopoly, competition, insurance, adverse selection.
    JEL: G22 H20
    Date: 2009–10
  3. By: Paul Madden
    Date: 2010
  4. By: Stefano Colombo (DISCE, Università Cattolica)
    Abstract: Using a spatial model with two separated markets, we study how taxation alters the incentive to prey of an incumbent firm facing a potential entrance by another firm. We show that for intermediate levels of the transportation costs, the higher are taxes the lower are the expected gains from the predatory strategy. We also show that under some conditions setting a positive level of taxes may induce a duopolistic equilibrium instead of a monopolistic one, and this ultimately increases welfare.
    Keywords: Taxation; Predation; Spatial model.
    JEL: D43 L11
    Date: 2010–03
  5. By: Tim James; Jolian McHardy (Department of Economics, The University of Sheffield Author-Person=pmc71)
    Abstract: We derive a measure of welfare loss as a proportion of the value of sales under quantity-setting symmetric oligopoly in terms of the equilibrium industry price elasticity of demand, the number of firms in the industry and a conjectural variation term in the context of the standard linear model. This generalises the monopoly measure in James and McHardy (1997).
    Keywords: Oligopoly, Welfare loss, Elasticity
    JEL: D60
    Date: 2009–06
  6. By: Junseok Hwang; Dongook Choi; Jongeun Oh; Yeonbae Kim (Technology Management, Economics and Policy Program(TEMEP), Seoul National University)
    Abstract: Internet portals serve as platforms that coordinate advertising and user markets, and the portal market features network effects within and between both sides. We model the market structure in order to explain network effects and other factors of competition such as prices for advertisements, contents, and differentiated services offered. We empirically identify these effects with data from South Korea and analyze the role of the effects in terms of profit and market efficiency. The results indicate that a negative indirect network effect exists in the user market but is prevailed over by the direct network effect. This explains how Internet portals make profits by increasing user visits. Further, we show the existence of network effects causes consumer¡¯s surplus not to decrease with market concentration.
    Keywords: Internet Portal Industry, Network Effect, Two-sided Market, Market Efficiency
    JEL: D21 H25 H32 L11
    Date: 2009–10
  7. By: Christina Guenther
    Abstract: The question of whether and when to enter a newly emerging product market has been the focus of practitioners as well as researchers. This paper contributes to the literature by investigating the order of entry as well as pre-entry experiences with a population-based approach for the radically new product market of multifunctional machine tools for the case of Germany between 1949 and 2002. Estimation results show, that later entrants outperform pioneers. Moreover, it turns out that industry and technology specific capabilities do not increase survival chances. But when decomposing the known positive age effect on survival, we see that particularly dynamic capabilities, i.e. the competence to integrate additional business activities into the current product portfolio, significantly lower the risk of failure in the new product market.
    Keywords: Length 20 pages
    Date: 2009–12
  8. By: Jean-Yves Duclos; David E. Sahn; Stephen D. Younger
    Abstract: The paper investigates how comparisons of multivariate inequality can be made robust to varying the intensity of focus on the share of the population that are more relatively deprived. It follows the dominance approach to making inequality comparisons, as developed for instance by Atkinson (1970), Foster and Shorrocks (1988) and Formby, Smith, and Zheng (1999) in the unidimensional context, and Atkinson and Bourguignon (1982) in the multidimensional context. By focusing on those below a multidimensional inequality “frontier”, we are able to reconcile the literature on multivariate relative poverty and multivariate inequality. Some existing approaches to multivariate inequality actually reduce the distributional analysis to a univariate problem, either by using a utility function first to aggregate an individual’s multiple dimensions of well-being, or by applying a univariate inequality analysis to each dimension independently. One of our innovations is that unlike previous approaches, the distribution of relative well-being in one dimension is allowed to affect how other dimensions influence overall inequality. We apply our approach to data from India and Mexico using monetary and non-monetary indicators of well-being.
    Keywords: Inequality, multidimensional comparisons, stochastic dominance
    JEL: D3 I3
    Date: 2010
  9. By: Chao Gu (Department of Economics, University of Missouri-Columbia)
    Abstract: In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.
    Keywords: sunspot equilibrium, correlated equilibrium, imperfect coordination, imperfect information.
    JEL: D82 G21
    Date: 2010–02–11
  10. By: Sophie Bade (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: A game-theoretic framework that allows for explicitly randomized strategies is used to study the effect of ambiguity aversion on equilibrium outcomes. The notions of "independent strategies" as well as of "common priors" are amended to render them applicable to games in which players lack probabilistic sophistication. Within this framework the equilibrium predictions of two player games with ambiguity averse and with ambiguity neutral players are observationally equivalent. This equivalence result does not extend to the case of games with more than two players. A translation of the concept of equilibrium in beliefs to the context of ambiguity aversion yields substantially dierent predictions – even for the case with just two players.
    Keywords: Uncertainty Aversion, Nash Equilibrium, Ambiguity
    JEL: C72 D81
    Date: 2010–03
  11. By: Hans Jarle Kind (Norges Handelshøyskole, Bergen); Marko Koethenbuerger (Department of Economics, University of Copenhagen); Guttorm Schjelderup (Norges Handelshøyskole, Bergen)
    Abstract: Two-sided platform firms serve distinct customer groups that are connected through interdependent demand, and include major businesses such as the media industry, banking, and the software industry. A well known result of tax incidence is that consumers of a more heavily taxed good pay a higher price and thus buy less of the good. The present paper shows that this result need not hold in a two-sided market. On the contrary, a higher ad valorem tax may lower end-user prices and spur sales. Thus, two-sided platform firms may not at all engage in tax shifting via price increases. We further show that a higher ad valorem tax may undermine a firm's incentive to differentiate its product from that of its competitors. Finally, we demonstrate that the effects of increasing specific taxes may be the opposite of those of increasing value added taxes.
    JEL: D4 D43 H21 H22 L13
    Date: 2010–03
  12. By: Garcia-Rosa, Alfonso; Kiss, Hubert Janos; Rodriguez-Lara, Ismael (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)
    Abstract: We develop, both theoretically and experimentally, a stereotypical environment that allows for co-ordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others’ actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects’choice is not a¤ected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects’choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.
    Keywords: bank runs, coordination failure, experimental evidence, networks
    JEL: D12 R23
    Date: 2010–01
  13. By: Tatsuya Kubokawa (Faculty of Economics, University of Tokyo)
    Abstract: The estimation of a linear combination of several restricted location parameters is addressed from a decision-theoretic point of view. A bench-mark estimator of the linear combination is an unbiased estimator, which is minimax, but inadmissible relative to the mean squared error. An interesting issue is what is a prior distribution which results in the generalized Bayes and minimax estimator. Although it seems plausible that the generalized Bayes estimator against the uniform prior over the restricted space should be minimax, it is shown to be not minimax when the number of the location parameters, k, is more than or equal to three, while it is minimax for k = 1. In the case of k = 2, a necessary and sufficient condition for the minimaxity is given, namely, the minimaxity depends on signs of coefficients of the linear combination. When the underlying distributions are normal, we can obtain a prior distribution which results in the generalized Bayes estimator satisfying minimaxity and admissibility. Finally, it is demonstrated that the estimation of ratio of normal variances converges to the estimation of difference of the normal positive means, which gives a motivation of the issue studied here.
    Date: 2010–03
  14. By: Noriaki Matsushima; Tomomichi Mizuno
    Abstract: We provide a simple model to investigate decisions on vertical integration/separation. The key feature of this model is that more than one input is required for the final products of the local downstream monopolists. Depending on their cost structure, downstream firms' decisions on vertical separation can be both strategic complements and strategic substitutes. As a result, the equilibrium number of vertically integrated firms depends on the cost structure. When the local downstream monopolists merge, vertical separation tends to appear in equilibrium. When an upstream firm can price discriminate, the downstream firms vertically separate. When the downstream firms compete with each other, vertical integration tends to appear if the degree of product differentiation is lower.
    Date: 2010–02
    Abstract: This approach introduces idea mining as process of extracting new and useful ideas from unstructured text. We use an idea definition from technique philosophy and we focus on ideas that can be used to solve technological problems.<br> The rationale for the idea mining approach is taken over from psychology and cognitive science and follows how persons create ideas. To realize the processing, we use methods from text mining and text classification (tokenization, term filtering methods, Euclidean distance measure etc.) and combine them with a new heuristic measure for mining ideas.<br> As a result, the idea mining approach extracts automatically new and useful ideas from a user given text. We present these problem solution ideas in a comprehensible way to support users in problem solving. This approach is evaluated with patent data and it is realized as a web-based application, named 'Technological Idea Miner' that can be used for further testing and evaluation.
    Keywords: Idea Mining, Text Mining, Text Classification, Technology
    Date: 2009–11
  16. By: Lesley Potters (JRC-IPTS)
    Abstract: This research investigates deals with the impact of various innovation activities on innovation output by using Spanish CIS3 data on 3,247 innovative firms and applying several Knowledge Production Functions. It is confirmed that different innovation activities lead to differences in both the propensity to innovate and innovation output, depending on the technological characteristics a firm has. In general, internal R&D leads to product innovation, while machinery acquisition leads to process innovation. Size, group belonging and protection of innovations are important determinants for innovation output, but show either a positive or negative relation, depending again on the firm's innovation strategy.
    Keywords: R&D, innovation, Knowledge Production Function, double sample selection
    JEL: O33
    Date: 2009–06
  17. By: Nils Braakmann (Institute of Economics, Leuphana University of Lüneburg, Germany)
    Abstract: This paper provides first evidence on the social returns to education from both firm-level and regional human capital. Using panel data from German social security, both at an individual and aggregated at the plant and regional level, I estimate earnings functions incorporating measures of regional and firm-level human capital while controlling for various types of unobserved heterogeneity, demand shocks, regional physical capital and other regional and firm-level confounders. The results suggest negligibly small external returns to the firm-level shares of high-skilled workers. On the regional level, the results show no support for external returns to education, except for skilled workers.
    Keywords: Human capital externalities, social returns to education, error-component model
    JEL: D62 J24 J31 R11
    Date: 2009–09
  18. By: Thorbecke, Willem (Asian Development Bank Institute)
    Abstract: Many argue that the yuan needs to appreciate to rebalance the People's Republic of China's trade. However, empirical evidence on the effects of a CNY appreciation on the People's Republic of China's exports has been mixed for the largest category of exports, processed exports. Since much of the value-added of these goods comes from parts and components produced in Japan, the Republic of Korea, and other East Asian supply chain countries, it is important to control for exchange rate changes in these countries. Employing dynamic ordinary least squares, or DOLS, techniques and quarterly data, this paper finds that exchange rate appreciations across supply chain countries would cause a much larger drop in processed exports than a unilateral appreciation of the yuan.
    Keywords: exchange rate changes prc; prc processed exports; global imbalances; exchange rate elasticities; china
    JEL: F32 F41
    Date: 2010–03–03

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